Thursday, July 31, 2014

We are glad to inform you that our Hidden Gem stock of Feb'14 - Atul Auto Ltd (BSE Code: 531795, NSE Code: ATULAUTO) has made life time high of Rs. 674 today and currently trading at price of Rs. 655, giving absolute returns of 132% in short span of 5 months to our Hidden Gem members. Our team suggested Buy on Atul Auto Ltd at price of 282.50 on 28th Feb'14.

Company has yet not announced its 1st quarter results. However, Atul Auto continue to post robust sales on monthly basis. In the month of June, company sold 3,222 units with volume growth of 14.99% compared to 2,802 units last year.

On 26th June, board of directors of the company has approved the sub-division of equity shares, and equity share of the company of the face value of Rs. 10/- each, shall be sub-divided into two equity shares of face value of Rs. 5/- each. Stock split is a good decision by the management as it will increase the liquidity of share with rise in trading volumes going forward. We suggest our members to continue to hold Atul Auto in their portfolio from medium to long term perspective.

Below is the summary of Atul Auto Ltd shared by our team under Hidden Gem stock recommendation - Feb'14

1. Company Background

Atul Auto Ltd is a leading manufacturer of 3-wheeler commercial
vehicles in the state of Gujarat and now gradually spreading its wings across
India.

The Company manufactures 3-wheelers in the sub 1 tonne category
targeting the passenger and cargo segments. In passenger segment, the Company
manufactures the Diesel & CNG powered carriers for carrying 3 to 6
passengers. In the cargo segment, the Company manufactures vehicles with a
rated carrying capacity of 0.50 tonnes. Both these vehicles have been approved
by the Automotive Research Association of India under the Bharat Stage-III
norms. It also provides customized vehicles like tippers, hydraulic hoppers,
vegetable vending vans etc. and these vehicles find wide application in courier
services, industrial products, laundry, construction, dairies, caterers, FMCG
distribution, LPG distribution etc.

The Company has its plant at Village Shapar at a distance of 18
kms from Rajkot. The plant commenced its commercial production from July 1992
and the present installed capacity is 48000 vehicles (from April 2013) per
annum.

In the last few years the company has improved its market
position in the domestic 3- wheeler industry with incremental market share in
the 0.5 tonnes goods as well as passenger carrier segment (third largest player
in 0.5 T three wheeler industry) by expanding its distribution network beyond
Gujarat, increasing its capacity and by launching new products.

The company has 150
exclusive dealers, more than 100 sub-dealers, 14 regional offices and 3
training centers in 16 states of India.

Atul Auto, one of India's leading three-wheeler makers, was
struggling to maintain its monthly run rate of 1,000 units till 2009, and was
dismissed as a fringe player, whose presence was largely restricted to
Gujarat.

But it all changed for the company after it started making rear mounted engines for three wheelers and focused on
tier-II and tier-III cities. The company now commands a market share of 7.3 per cent as on November 2013
against less than 1 per cent five years ago, and has posted an average volume
growth of 17 per cent in trailing four quarters compared with industry's 2 per
cent.

"We are expecting volume growth of 20-25 per cent for the
next year, while the industry growth will be around 6-8 per cent y-o-y. The low
base effect, reaching out to untapped markets, and increasing dealer footprints
would drive our volume growth," said JJ Chandra, CMD of Atul
Auto. "We are increasing our dealer base to 250 by FY15 end from 179 now,
and new dealers are largely going to focus on markets beyond Gujarat
and Rajasthan."

With the bigger players catering to urban markets, Atul Auto saw opportunity in tier-II and -III cities
and built its strategy around them. For instance, it customized its products to
meet the expectations of smaller cities and rural areas. The customization
included capacity to bear overloading, higher mileage of 35 a litre and a
warranty of 24 months against 14-16 months offered by competition.

The strategy worked for Atul Auto as sales started trickling in
from other states other than Gujarat - the western state now contributes 40 per
cent to its sales compared with 100 per cent about five years ago. States like
Kerala and Assam contribute 7 per cent to its sales now, and the company is
planning to make inroads into West Bengal and Tamil Nadu.

Atul Auto invested Rs 12 crore to increase its installed capacity
to 48,000 units a year from 24,000 units a year in Rajkot. It is now building a
new facility in Ahmedabad with an investment of Rs 100 crore, which would add
another 60,000 units a year which will be ready in the next 18-24 months. The
capital expenditure would be funded by internal accruals and the balance sheet
is likely to remain debt free.

Post the Ahmedabad facility, the company is exploring the
opportunity to increase its export share, where realisations are higher. The
company is in discussions with several distributors in Africa.

Rajkot based three-wheeler maker Atul Auto Limited is planning to
set up new production unit of around 50,000 units per annum (pa) with an
investment of around Rs 100 crore. This would more than double the company's
existing capacity.

"While the entire industry is experiencing negative growth,
we are growing. Considering the potential in the Indian market, as well as
opportunities in the overseas business, Atul is considering to expand its
production capacity," said Niraj Chandra, director of Atul Auto. At
present, Atul Auto's management and technical team is studying the various
aspects of the project. The company is planning to have a production unit with
a capacity of around 50,000 units pa. The company did not wish to specify a time-frame
for the project. Chandra added, "It is difficult to talk about a specific
location, but our first preference is Gujarat as we belong to this area.
However, we are not closed to considering other states as options. Final
decision will be taken after our project team finishes their work."

Earlier, during this financial year Atul has already doubled its
production capacity from 24,000 units pa to 48,000 units pa at its Rajkot
factory with an investment of about Rs 30 crore. For new expansion the company
is planning to invest about Rs 100 crore. At the new unit, company will
continue to produce our existing models. Moreover, Atul Auto plan to introduce
new models too. Atul Auto is also planning to introduce a petrol model of Atul
Gemini by end of March 2014.

At present AAL exports are negligible, but there is huge potential
in the under-developed or developing countries like India where reasonable
transportation is an issue. Atul Auto is currently exporting in five African
countries including South Africa and Kenya. It is also exporting in Bangladesh
under a technical tie up. The company has planned to invest in Sri Lanka and
already proposal for that has been filed to Sri Lankan government in
2012.

iii) Entering in new geographies and expanding distribution
network

Atul Auto has been expanding its distribution network for the past
few years. Expansion in dealer network in new states has also enabled the
company to grow above industry rate with an increase in market share from 2.64%
at the end of Mar’07 to 3.81% at the end of Mar’13. Going forward, the
Company is going to explore new geographies coupled with new product offerings
in the pipeline and anticipated increase in the capacities. Another interesting
fact is that Raamdeo Agrawal of Motilal Oswal, who made a lot of money from his
multibagger stock picks like Hero Honda and SBI, has bought 1 lakh shares of
Atul Auto at Rs. 260 each on 5th Nov’13

3. Saral Gyan
Recommendation (as on 28th Feb'14)

1. Sales turnover
of the company have grown by almost 200% in the last 4 years and operating
margins have expanded from 4-6% to around 9-11% leading to much higher growth
in profitability. The company has further transformed from a regional player
with a strong foot hold in Gujarat and Rajasthan to a pan-india player.

2. During H1 FY14, the 3 wheeler industry has witnessed a volume
de-growth and the major players like Bajaj Auto and Piaggio de-grew in sales
volume whereas Atul Auto Ltd registered a growth of 18.9% YoY to 17,144 units.
AAL continue to outperform its competitors, it has delivered volume growth of
above 18% in Jan and Feb’14 whereas domestic sales of 3 wheeler in India is
still witnessing de-growth. The company expects to register a volume growth of
50,000 units in FY15 as against 32,040 units achieved during FY13 and 17,144
units in H1 FY14.

3. Company has made entry into new geographies within India
but it still it has a long way to go as its base in other states is still very
small. Moreover, company is also focusing on exports with plans to launch new
models. As per ICRA research exports will be the fastest growing segment for
the Indian 3 wheeler industry. In order to cater to the same, Atul Auto has
developed a 0.35 tonne passenger carrier. We believe that company continue to
outperform and will deliver volume growth of > 20% for next 2 - 3 years.

4. Management is now looking aggressive to continue grab domestic
as well as exports market share for its products with expansion in distributor
network. Company is increasing
its dealer base to 250 by FY15 end from 179 now, and new dealers are largely
going to focus on markets beyond Gujarat and
Rajasthan. The company is planning to make inroads into West Bengal and Tamil
Nadu. Exports sales is also expected to augur well for the company as currently
contribution of exports is less than 2%.

5. The company is currently working on
establishing a second plant at Ahmedabad which is expected to begin production
in FY 16, the new plant would also have a capacity of 48,000 units and would
require an initial capex of Rs. 800 – 1000 million which would be primarily be
funded through internal accruals and the balance sheet is likely to remain debt
free.

6. On the bottom-line
front, from last 5-6 quarters the company is continuously reporting operating
margin improvement due to lower material cost and effective cost management
strategy. Going forward, we believe that the company would improve its volume
growth aided by capacity expansion, setting of an assembly plant in Sri Lanka,
increasing dealership network in India and focus on exports.

7. Management has rewarded
shareholders by paying consistent dividends since last 4 years. Atul Auto has
distributed 25% of its net profits in form of dividends. During the same period, company repaid its debt and is
now a debt free company. Dividend yield at current market price is above
2. Company also issued bonus share to shareholders in 2012 at the ratio of 1:2
and right issue in 2011 at Rs. 30, however the stock at that point of time was close to Rs. 100. This clearly shows that company’s management is prudent and is good towards the interest of
minority shareholders.

8.
On equity of Rs. 112 million, the estimated annualized EPS for FY 14-15 works
out to Rs. 30.8 and the Book Value per share is Rs. 82.3. At current market
price of Rs. 282.50, stock price to book value is 3.43. As per our estimates, Atul Auto Ltd can
deliver bottom line of 345 million for full financial year 2014 – 15, with
forward P/E ratio of 9.1 X for FY 2014-15, which makes stock an attractive bet
at CMP.

Considering reasonable valuations and opportunities in domestic
& export markets, we find Atul Auto Ltd an attractive pick. Saral Gyan Team
recommends“BUY”on Atul Auto Ltd.for a target of Rs. 480 over a period of 12-24 months.

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Saral Gyan Capital Services

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